The Zacks Analyst Blog Highlights: Total, ConocoPhillips, Intel, Microsoft and Lockheed Aflac

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Aug 11, 2011, 09:30 ET

CHICAGO, Aug. 11, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Total (NYSE: TOT), ConocoPhillips (NYSE: COP), Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT) and Lockheed Aflac (NYSE: AFL).

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Here are highlights from Wednesday's Analyst Blog:

Dividends Grow, Coupons Don't

I don't know if this is the bottom of the market yet; there are lots of big macroeconomic headwinds. I do know that fixed income is not a good place to find a decent income these days.

While I don't see inflation as being a major problem today -- or in the near to intermediate-term future -- I would not rule out significantly higher inflation a few years down the road. T-notes anywhere on the yield curve do not offer any protection from that happening. Dividend-paying stocks do.

Stock Dividends Yielding Higher than T-Notes

There are a total of 115 stocks in the S&P 500 that do not pay a dividend. However, based on the T-note yields as of mid-day today, and the dividend yields as of last night's close (given the sell-off today, the actual dividend yields will be higher), that 328, or 85.2% of the S&P 500 stocks that do pay dividends have yields greater than that of the 5-year note (0.86%), 203 or 53.7% of the dividend payers yield more than the 10-year (2.11%) and 87 (22.5%) yield more than the 30-year long bond (3.50%).

The reason you buy stocks is that they represent partial interest in a company. You want to own companies, because over time they make a lot of money, and they can then pay that money out to you in the form of dividends. Even with stocks that currently don't pay a dividend, the idea is that they will be able to redeploy the cash they earn better than you could, so that they continue to grow their earnings and thus sometime down the road can pay out even bigger dividends.

Screening for a Strong List

To help identify some potentially great long-term bargains, I ran a screen. First I eliminated all the firms that have either a Zacks #5 Rank (Strong Sell) or Zacks #4 Rank (Sell). The Zacks Rank is an unparalleled short-term tool for traders. Even if a stock looks like a bargain today, you would be better advised to wait a month or two to buy it if it has a bad Zacks Rank. If you are a short-term trader, a good Zacks Rank (ideally a number #1, but a #2 is OK) should be absolutely the first thing you look for.

What the Screen Came Up With

Since I think the long-term direction of the dollar is lower (and I hope it is since that is the only way we will get the trade deficit, which is sucking the economic life out of the country, under control), what companies earn overseas is going to be more valuable than what they earn here as those earnings are translated back into dollars. Of course, many U.S. companies earn a very large part of their earnings from abroad as well.

Oil companies are common on the list. While oil prices have declined sharply in recent weeks, just as they did in the fall of 2008, I doubt that they are going to stay down for the long haul. Oil is simply very hard to find -- especially in places that are politically safe -- and demand continues to grow as the new middle class of places like China and India buy their first cars.

It is not an economic constraint on the world in increasing production. Oil prices are up more than ten-fold from the late 1990's and production has barely budged. The geological constraints are real. The value of existing reserves of oil should rise over time, and with it, the earnings and the dividends of the big oil companies.

Companies like Total (NYSE: TOT) and ConocoPhillips (NYSE: COP) are not going to go out of business anytime soon, and absent a BP-style disaster, it is highly unlikely that they would cut their dividends.

However, you don't have to put all of your money into the oil patch to get high and rising dividends. Two pillars of the tech world -- Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) -- are also on the list. Both are sitting on huge piles of cash and have not only been raising their dividends, they have also been buying back their stock, which economically is very similar to paying a dividend.

There are also very solid choices available in the major drug companies and medical device firms. Just because the market is down doesn't mean people are not getting older and won't need more drugs and devices in the future.

One U.S.-based company on the list actually gets most of its profits from Japan. Aflac (NYSE: AFL) has a brand and distribution system over there for supplemental health insurance that would be almost impossible to replicate. It has a history of raising its dividend that goes back much further than five years.

With a payout ratio of just 20% they have lots of room to raise the dividend even if earnings don't rise. If Aflac keeps up their historic dividend raising pace, then in five years it will give you a yield on cost of 5.76%, and in ten years 11.52%. That sort of income you could retire on.

Caveats on the Overall Market

Is the current downturn in the market over? Honestly, I don't know. There are some very good reasons for the downturn. While corporations are in great shape, the economy is not. The government is not in a good position to help get it going again, especially after the recent debt ceiling agreement essentially took away the possibility of using fiscal stimulus to get unemployment down and economic growth up.

It is very brittle to any external shock, and the shocks coming out of Europe -- with the potential breakdown of the single currency itself -- are big ones. Still, the U.S. has been through worse, and has always come out the other side.

These are the sorts of times that are the best friend to the long-term investor. Don't try to be a hero in here and shoot for the most aggressive names. But don't hide in a hole and curl up in the fetal position. Start buying good solid companies paying attractive, safe and preferably growing dividends. Five years from now you will be very glad that you did.

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